In keeping with the critique of orthodox economic theory that we have developed in this Blog, what we present here in an entirely new approach to economic theory that takes into account not just how products are "exchanged" in an economy but also and above all how these pro-ducts are pro-duced ("brought forward") - and therefore how a system of exchange interacts with the environment - which is essential to understanding what human societies and "economies" are in substance and reality.
The commonsense of this tool of analysis may be formulated as follows: first, if we deal with, say, the organism of a dog, the interpretation of what we observe divides readily into two branches. We may be interested in the processes of life going on in the dog, such as the circulation of the blood, its relation to the digestive mechanism, and so on. But however completely we master all their details, and however satisfactorily we succeed in linking them up with each other, this will not help us to describe or understand how such things as dogs
Joseph Schumpeter, Business Cycles. (1939) 29
have come to exist at all. Obviously, we have here a different process before us, involving different facts and concepts such as selection or mutation or, generally, evolution. In the case of biological organisms nobody takes offense at the distinction. There is nothing artificial or unreal about it and it comes naturally to us; the facts indeed impose it on us.
It is incessant change in the data of the situations, rather than the inadequacy of the data of any given situation, which creates what looks like indeterminateness of pricing. We conclude, on the one hand, that we must take account of this pattern when dealing with the process of change which it is our task to analyze in this book and which must be expected to create precisely such situations, and, on the other hand, that it does not paralyze the tendency toward equilibrium [Gleichgewichtstendenz](Business Cycles, p.43)
As we can see, Schumpeter discusses in the same breath two matters that he does not link explicitly but whose link is necessary nonetheless: and the reason that he fails to make this link explicit is that he does not see that the link is indeed necessary! First, there is the fact that his shift in approach to economic theory from static analysis (Statik) to dynamic theory (Dynamik) involves the examination of “the economic system” not as an aggregate of inert mechanical bodies governed by pure economic laws that mirror exactly the laws of mechanics, so that any “change” to that system must be due to “exogenous factors”, but rather as a living organism made up of component members that interact meta-bolically both with one another and with their physical environment. But then, again discussed “in the same breath”, there is the fact that this novel approach of treating the economic system as a living organism so that there is “incessant change” in economic data means also that now “prices are indeterminate”, although Schumpeter hastens to add that this “does not paralyze the tendency to equilibrium”, falling thus into the error that we pointed out previously, namely, that of treating Dynamik and Statik as a categorical continuum when he himself admits throughout his oeuvre that the two processes, evolution and equilibrium, are categorically incompatible.
As we saw in an earlier section of this review, the real reason why prices must be indeterminate in Schumpeter’s novel approach – the Dynamik - is not so much that there is “incessant change” in economic data, as Schumpeter seems to believe, but rather that the economic system is now seen as a living organism that interacts metabolically with its physical environment - with its “physis”. Schumpeter does not see that his “economic agents” (Wirthschafts-subjekte) cannot be treated as “atomistic individuals” because these presumed “in-dividuals” are now able to pro-duce, “to innovate”, rather than merely to exchange existing “endowments”. In other words, in the Dynamik, the individual component members of the economic system become economic agents able to initiate economic activity, that is to say, they can pro-duce new economic resources and needs rather than merely exchange existing or “given” economic resources - the “endowments” of neoclassical equilibrium theory. These presumed “individuals” are now theoretically able to produce for exchange and to exchange for production, and not simply “to exchange”. Because of this, it is impossible to attribute a “scientifically objective” or “determinate” or “absolute” value or price to production because prices regulate the distribution of the product and it is quite impossible to attribute both the “ownership” of the product and the economic claim to the pro-duct on the part of different pro-ducers because pro-duction involves the metabolic interaction of individual economic agents, singly and collectively, with their physical environment. And this metabolic interaction is impossible to measure – to value and to price – because it constantly changes the relations among individual producers in both a quantitative and a qualitative sense. To repeat, it is impossible to attribute “ownership” and economic claims by producers to production because “economic agents” are now considered not merely to exchange existing resources (endowments) with one another, but instead are also able to produce new resources by interacting meta-bolically with the physical environment in which “the economic system” operates.
And they interact metabolically with the physical environment not ontogenetically, as atomistic individuals; instead, they must so interact phylogenetically, as component members of a living organic community. For it is impossible for an economic system that is a living organism to attribute ownership claims to its individual members given that, as a living organism, it must interact metabolically with its “physical environment”! Indeed, although it is tempting to refer to this physical environment as “the external physical environment”, it is quite misleading to do so because there is nothing “external” to a living organism about the physical environment in which it must metabolize.
This is why prices are indeterminate in this new framework of social analysis: if we treat the economic system not as a “closed totality” but rather as a living organism metabolizing with its physical environment it is quite impossible to calculate at all, through any “price mechanism”, the contribution of individual members to the production or welfare of the living organic community.
We can see therefore that by moving away from Statik to Dynamik Schumpeter ought to have added three new inter-related theoretical components to his analytical framework: the first is “social labour”, the second is “production”, and the third is “metabolism”. It can be objected that Schumpeter meant to include all three elements in his overall category of “innovation”, but we will show presently that although the concept of “innovation” certainly includes that of “pro-duction”, intended as the making of fresh resources and needs, Schumpeter fails to theorize “pro-duction” explicitly as “metabolism” or “living activity”, and the other two elements he either confuses (“individual labours” with “social labour”) or wholly neglects (metabolism) because of his obsessive focus on “the economic system” as “totality” and on metabolic production as “individual labour” rather than “social labour”.
The fact that the economic system is now “transformed from within” by its economic agents who are not subject to inflexible axioms set “from outside” –, this fact means that the “prices” that obtain in the economic system must be “indeterminate” for the simple reason that it is impossible to assign a logico-mathematical or “scientifically absolute” value on the innovations that transform the economic system by means of an “objective market mechanism”. To be “objective”, prices and values in Schumpeter’s “pure economic theory of economic change” would have to be determined objectively, from outside - as if the economic system were a “closed system” or “totality”. But this is precisely what his theory of economic development (Entwicklung) cannot allow because its central postulate is that any change, mutation, trans-formation or e-volution of the economic system must be endogenous, must come “from within” as well as be “incessant”, and therefore the “change” or “mutation” must be in relation to the “without”, the “physical environment” in which “the economic system” operates – not as a “closed” system but as a metabolic living organism.
Again, what makes prices and values “indeterminate” is not so much that the economic system is in a state of “incessant change”, as Schumpeter maintains, but rather it is the fact that this “incessant change” is the outcome of decisions and actions taken by “economic agents” - and not by the “inert mechanical bodies” of neoclassical equilibrium theory - in relation to a physical environment that allows them to produce metabolically fresh resources and needs that constantly transform the existing relations of production between “economic agents” both individually and collectively. For this reason, the very notion of “innovation” is simply categorically incompatible with the “objective” (meaning “internally fixed”) determination of relative prices based on Subjective Value that obtains in Walrasian equilibrium or indeed with the “objective” (meaning “externally fixed”) determination of absolute prices prescribed by the Labour Theory of Value of Classical Political Economy.
Because this “dynamic” economic system is transformed from within by the innovative actions of what are now properly-called “economic agents” and not by the “inert mechanical bodies” of “static” Walrasian equilibrium – for this reason, the economic system is no longer one of “pure exchange” but it becomes instead one in which pro-duction takes place, one in which goods and services are pro-duced (“brought forth”) metabolically by the interaction of economic agents not only with one another but also with their physical environment. This means that not only are economic agents interacting individually with one another and with the physical environment: but it means also that “the economic system” cannot be examined in its entirety, as a whole, as a totality, precisely because it is interacting meta-bolically with its physical environment – just like a living organism. Only when “exchange” involves “pro-duction” can this exchange be more than a sterile “id-entity” (the same entity); only then can it make a “dif-ference” (a practical, unquantifiable, qualitative change): only then can there be “change in the ex-change” between economic agents - precisely because the exchange is un-equal in that its “value” is now determined not relatively to its individuals, not subjectively, but collectively in metabolic relation between the economic system as a living organic community and its physical environment.
This means that market exchanges no longer constitute a “zero-sum game” but effectively change the internal relations of individual participants both quantitatively and qualitatively so that prices and values are not just indeterminate but in fact are meaningless in any other than a political sense – in the sense that any equality or equi-valence can be established only politically, either violently or legitimately. In other words, unlike the Statik, in the Dynamik “pure exchange” is no longer possible: economic agents exchange to pro-duce and pro-duce to exchange. This means essentially, as we are about to see, that “pro-duction” is “living activity” or “living labour” and that there can be no “individual labours” but only “social labour”. Put differently, “labour” is a phylogenetic, not an ontogenetic category.
Schumpeter’s likening of the economic system to a “dog” in the quotation above reveals most clearly his mental confusion in this regard: because if the economic system is regarded as a living organism that, first, interacts metabolically with a physical “medium” in which it can evolve, and therefore, second, can assess and theorize this “evolution” in relation to some “frame of reference” that can be “objective” only in the sense of being the result of decisions and actions taken by the component members of that living organism as an organic community, then it is obviously quite impossible to assign and attribute precise “values and prices” to the contributions of individual members of that living organism as if these individual members or “economic agents” were separable from the living organism! It is obvious that any such “separation” and assessment of “individual contributions” can occur only by means of ethical or political standards that the organic community imposes on itself – but most certainly not by means of an “absolute scientific standard”.
The fact that Schumpeter sees “the economic system” on one side as a living organism - as a “dog” - that must confront its physical environment, and then on the other side as a collection of atomic individuals who are able to mutate the economic system “from within” through their autonomous “innovations” without interacting as a collective living organism with their (“external”) physical environment – this fact is the source of all the confusions in which Schumpeter gets mired. On the one hand, Schumpeter wishes to examine “the economic system” as a “closed totality” whose component members can be treated as isolated “individuals”; but then, he forgets that this is impossible without considering how this “totality” or “system” must interact metabolically with its physical environment and therefore how it can no longer be treated as a “totality” or “system” that can be mutated “from within” by its “individual members” without this “mutation” or “evolution” having to be assessed not from the viewpoint of “the atomic individual” but exclusively from the viewpoint of “the living organism”, of the living organic community, by reference to its physical environment !
The change from an atomistic theory like that of equilibrium in which estimations of value are entirely individual and subjective and therefore can be described – not measured, if by “measure” we mean an absolute standard! – and determined tautologically in terms of relative prices, to an organicist theory in which the economic system is “measured” against its physical environment in terms of a politically agreed and collective standard –, this change in the theoretical framework of analysis means that now “the economic system” is no longer based on competition between atomic individual members but rather on an organism or better an organic community (in the case of animals, a species) that is not a “closed totality “ but is instead a living organism dealing meta-bolically with its “physical environment”!
The point here is that if we start with an atomistic state like equilibrium, then the rules of exchange must be imposed exogenously whilst at the same time it is impossible to assess the efficiency of the “economic system” as a whole - as an “economic system”, at the “systemic” level, as a totality, because that “totality” would have to encompass its physical environment and therefore it could never constitute such a “totality” intended as a closed system whose prices and values are determined internally or self-referentially. The axiomatic atomicity of equilibrium theory, by making all values strictly individually subjective, forces us to treat the economic system precisely as such a “closed self-referential system” or “totality” and prevents us from treating it as a living organism dealing “openly” or metabolically with its physical environment! Yet, if we assume that “the economic system” is a living organism, then it will be impossible to determine individual contributions from its “members” to overall social production or wealth precisely because there are no “individual contributions” or “individual labours”, whereas in fact we have social contributions or social labour.
Perhaps the greatest mistake that Adam Smith made in his analysis of the division of labour (and therefore of production) in Book Two of The Wealth of Nations was to treat this “division of labour” as the effect of exchange and not as the cause of exchange! Anybody with any spark of historical and anthropological knowledge and any scintilla of thoughtful reflection will be able to conclude that human beings are able to exchange anything not only because they cannot engage in “individual labours” but because they are physiologically incapable of surviving, like the robinsonnade in Defoe’s Robinson Crusoe, as isolated “individuals”! Human beings quite simply could not even exist as “individuals”, let alone be able to survive, in complete isolation! All human labour is “social labour” and cannot even be conceived as “individual labour”! Brian Loasby has reminded us that “exchange is a matter of life and death”, without for that matter being able to perceive the inevitably phylogenetic nature of human labour. But this notion of the indispensability of the division of social labour – and therefore of “exchange”! – is a conclusive counter-argument to the Hobbesian notion of “the state of nature” – on which Neoclassical equilibrium theory is based - as a system made up of atomistic self-interested individuals.
Atomistic theory can determine only “relative exchanges” whereas organicist theory can assess only “communal goals”: the two “systems” are simply incomparable and incommensurable because the first can be viewed as a “totality” because its “individuals” are mechanically inert bodies, whereas the second is in constant “becoming” and the decisions and actions of its “individual members” cannot be assessed “individually”. Neither theory can ever devise an Objective Value for the simple reason that living activity – whether human or otherwise - cannot be measured in terms of a standard of value that is “external” to that activity or “absolute”! For human communities, any such “standard of value” can be applied only as the result of political domination by some social agents over others or else by political consent – but never “objectively” in terms of an absolute standard!
Once again, the central point that we are making here is that, once we consider human society from an organicist rather than an atomistic viewpoint, “economics” as a sphere of social analysis separate from “politics” becomes quite simply im-possible because the partiality of all “economic” concepts, the im-possibility of reducing human activity to “purely economic” categories, implies their “dissolution” in any “scientific” sense. It was this socio-political “separation” (Trennung) of human society between economy and politics, between private property and political institutions, between bourgeois and citizen, between civil society and political State that was the ultimate theoretical concern of the rationalist philosophers from Rousseau and Hegel to Marx. And it was the assertion of the ultimate im-possibility of over-coming and super-seding this “separation” (Trennung) – in fact, the impossibility of any “social synthesis” both at the economic level, between economic agent and product, and at the sociological level, between private (property) and public (political) spheres – that is the central and essential feature of the negatives Denken from Schopenhauer to Nietzsche and Weber, to the Austrian School and Heidegger.
Indeed, it is this very “separation” (Trennung) extended to the individual level of any “economic agent” – be it a worker or entrepreneur - from (a) the immanently “social” nature of production in a phylogenetic and physio-logical sense (not the division of “labour”, which is an empty abstraction, but the division of social labour which bourgeois economic theory reduces to “individual labours”), (b) the means of production, and (c) the pro-duct - that constitutes the most indispensable foundation of the negatives Denken at the economic level as a reaction to Hegel’s dialectic of “self-consciousness” first expounded in the Phenomenologie des Geistes and later elaborated in Marx’s critique of political economy. As Weber makes clear from the very opening of Parlament und Regierung, the matter of “ownership” is always and everywhere one of sheer violence: it is the overlord who enforces the separation of the peasant from the land, of the artisan from the tools – and indeed of the soldier from the weapons. – And therefore also from the “pro-duct” of their activities. Schumpeter himself draws the essential distinction between “directing” and “directed” labour in the opening chapter of the Theorie in a manner that clearly indicates the lack of con-nection between worker and pro-duct. The simple fact that the claim by the Entrepreneur to the “profit” generated from “innovation” can only be “legal” means immediately that this claim will be disputed and will be the subject of conflict – and that indeed even the adoption of innovations will give rise to social conflict.
The insuperable contradiction of Neoclassical Theory and of the Austrian School is that they firmly espouse the negatives Denken with regard to this “separation” – the Trennung - at the individual and at the social level, and yet they claim to be able to establish a scientific economic link between producers on one side and their claims to the distribution of the product on the other side!